Wednesday, June 17, 2015

Does Your Organization Have a Glide Path to the Cadillac Tax?

The ACA expanded health coverage to millions. The Cadillac
Tax helps to cover the cost of the expansion by taxing employers that provide
"high-cost" health coverage to their employees. AKA -- Excise Tax.

What's a Glide Path?

When I was at the World Health Care Congress, I heard big
employers like Disney refer to a glide path. They've projected how the tax will
impact them and have plans in place that will allow them to limbo under the tax
thresholds (more on that later.) FOMO -- I want ASHA to have a glide path too.

Isn't there a proposal in Congress
to eliminate this tax?

Yes, two bills were introduced in the house earlier this
year H.R. 879, the Ax the Tax on Middle Class Americans’ Health Plans Act and H.R. 2050 — Middle Class Health
Benefits Tax Repeal Act. Nobody I've heard from on either side of the aisle thinks
the tax will be repealed though. Feel free to keep your fingers crossed.

Why don't the experts think it will
be repealed?

There is a financial hurdle to repeal. Expanding coverage
via the exchanges cost 849 billion dollars and another 847 billion in Medicaid
and CHIP outlays. This is being paid for in four ways:

Penalty
payments collected from uninsured people (43 billion)

Penalty
payments collected from employers (167 billion)

Cadillac Tax
(87 billion)

Other which
consists mainly of the effects of changes in taxable compensation on revenues (202 billion)

The Cadillac Tax estimate was adjusted down from an
estimate of 149 billion in January 2015 because premiums are not expected to
rise as much as originally thought. I suspect this is due in part to the
changes employers are making in their plan designs, but there is a lot of
pressure on cost containment throughout the system right now.

When does the tax go into effect?

The tax goes into effect January 2018, but employers are
already restructuring their health care benefit offerings or increasing
workers’ deductibles and copays to avoid the tax. SHRM reports that 21 percent
of its' members expect to decrease their health benefits offerings in 2015 and
7 percent said they're planning to reduce non-health benefits (such as
financial benefits and compensation or retirement savings and planning
benefits) for 2015 in response to the pending tax.

How do you calculate the tax?

In simple terms and highlighting just what's most relative
to ASHA and probably most of us in the association community, the formula looks like this. (It also includes any commissions you pay your broker.)

The value of coverage is compared to thresholds set in the
ACA -- $10,200 for individual coverage and $27,500 for self + other. Any Value
over the thresholds is taxed at 40%.

All employer and employee pre-tax contributions to HSAs and
FSAs are included in the calculation. HIPAA excepted EAPs will probably be
excluded. (EAPs that include face-to-face visits are subject to HIPAA.) There are some proposed adjustments for covered retirees that are at least 55, but not yet medicare eligible; high-risk professions like law enforcement; age and gender (if the age and gender characteristics of an employer's workforce are different from those of the national workforce. There is presently no adjustment for geographic location and that seems like a glaring omission to me. It's something we included in our comment letter to the IRS. State mandates impact the cost of coverage with heavily regulated states like Massachusetts and Maryland above the national average. This would create a double whammy for employers in these states.

Those thresholds sound more like a
Camry than a Cadillac.

Yep, 33 percent of employers are expected to be subject to
the tax in 2018.

Is it likely that the formula will
change before the tax goes into effect?

Yes, the IRS just requested comments in Notice 2015-16.
I helped to prepare ASHA's comment letter. (Bob Skelton at ASAE submitted a good one too.) It is expected that another IRS notice will be
issued in 2016 and followed by another comment period and then the final
regulations will be released in 2017.

So, what do we think this will cost?

For ASHA in 2018, the best case scenario is about $10,000; worst
case scenario about $310,000. There will be a COLA adjustment to the tax after
2019, but the picture only gets worse. In 2020, our best case scenario is about
$120,000 and the worst case scenario is $750,000.

You could drive a truck through the
gap in those projections. Is that the best you can do?

We have to make a lot of assumptions about the cost of
coverage and the choices ASHA staff will make to estimate our tax liability.

In the best case scenario, we included a 7 percent trend
increase in the cost of coverage. We also assumed staff continue with their
current HSA contributions and an average of the current FSA contributions. (The
latter is a lousy placeholder, but it’s a start.)

In the worst case scenario, we assumed a 12 percent trend
increase in the cost of coverage, increased the caps on the FSA by 2 percent
and the HSA by 5 percent and then assumed the staff currently participating all
max out their contributions.

When the IRS issues a final ruling on how the tax will be
calculated and we get closer to 2018, I can narrow the gap.

Either way, that's a lot of mula! What
can be done to minimize our potential tax liability?

ASHA's taken two big steps already by introducing a Consumer
Driven Health Plan (CDHP) and self-insuring our benefits. Employers have lots of options and need to decide what plan of
action is right for them. Many options take time to implement, so savvy employers are working on a three year plan now -- their glide path to 2018.